Here's Exactly How to GAME Redemptions (Optimize Your Collateral Ratio)

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By Connor
Estimated reading: 6mins
Optimal collateral ratio

I’ll let you in on a little secret…

If you utilize this strategy, your chances of getting redeemed against are EXTREMELY low.

Plus, you’ll get to optimize your collateral ratio, which can free up more of your capital and lead to bigger earnings.

Here’s what you need to know.

This article is part of the Chain Reactions series: expert opinions on everything blockchain and crypto.

The Highest Redemption Day Ever

True DeFi blockchains, like Liquid Loans and PulseChain, are transparent. All of the information they store can be easily accessed by anyone.

By looking at public information about the LL protocol, we can see that the highest redemption day in the history of Liquid Loans was 1.704 million USDL.

Importantly, the quantity of USDL that was redeemed on this day was an anomaly. It resulted from unusually high volatility in the price of PLS, fueling a discrepancy with the Liquid Loans price feed.

To learn more, watch this video with Crypto Crazy. He spoke about this abnormal event and explained how it has since been remedied.

Regardless, since we know what the highest redemption day in LL history was, we can get savvy with the Debt in Front Indicator tool. Here’s how.

How to Use the Debt in Front Indicator

A recent addition to the Liquid Loans Dapp is the Debt in Front Indicator.

It’s a useful tool that was created to help the community in a big way.

The Debt in Front Indicator displays how much USDL debt exists at a lower collateral ratio than your debt. This information can be used to determine how much of a buffer you have before your Vault can get redeemed against..

It can be found natively in the LL Dapp:

To make sense of using this tool, let’s look at the example below.

If you’re the first Vault owner at the top of this page, your Debt in Front (DIF) would be 0 USDL. This means that you’re next up whenever someone wants to instantly redeem USDL for PLS.

If you were the owner of the second Vault in this example, it would mean that you have a DIF of 428,937 USDL (the total of all the Vaults above yours).

This indicates that other users would have to redeem close to 429,000 USDL in order to start redeeming against your Vault.

So how do we use this information to our advantage?

Well, if we remember that the largest quantity of USDL redeemed in a single day was 1.7 million…

And that redemptions seem to be slowing down for now...

Users could find that keeping their Debt in Front at around 1.7 million could be enough of a buffer to shield them from redemptions. 

However, it’s also important to remember that past redemptions are no guarantee of future redemptions. There’s also always a chance that the debt of the Vaults in front of yours could shift to high collateral ratios.

As a result, using this strategy could incur risk. Only you can decide the collateral ratio that you’re comfortable with.

That being said, the consequences of a Vault being fully or partially redeemed are nowhere near as bad as a Vault being liquidated. In some specific circumstances, it can even result in gains. To learn about what actually happens during redemptions, check out this article.

How Much Are These Vaults Missing Out On?

In my opinion, some Vaults are massively overcollateralized. This means that these Vault owners are leaving money on the table.

To demonstrate, let’s pick on a Vault! At the current point in time, it’s the highest collateralized Vault in the system.

It collateralized 542 million PLS and minted 2,713 USDL, which is a collateral ratio of 1,945%!

This means that the Vault has a Debt in Front of 16.66 million USDL!

The only plausible scenario in which they’re not safe from redemptions would be if the ENTIRE circulating supply of USDL was redeemed all at once. Of course, that would probably mean that hell had frozen over and that pigs could fly.

So how could they use their money more efficiently?

In my opinion, they would be better off minting more USDL.

If they take on a total debt of 10,000 USDL by minting 7,287 more USDL, they would have a total collateral ratio of 513%.

This would still put a significant amount of USDL in front of their Vault!

At the current APR offered by the Stability Pool of 182%, this newly-minted 7,287 USDL could earn them an extra 13,262 USD worth of PLS and LOAN.

That’s a lot of money that they're missing out on right now.

Get Smart by Staying on Top of Trends

If you look at the analytics page of the Liquid Loans DApp, you can see that redemptions have slowed significantly. 

Numbers that used to be in the double digits have dropped all the way down to single digits.

Moreover, what used to be hundreds of thousands of USDL redeemed per day has dropped all the way down to just tens of thousands.

This gives users the opportunity to be more capital efficient when setting their collateral ratio, should they so choose.

When doing so, it’s worth monitoring these trends to stay ahead of the amount of USDL redeemed per day. 

That way, outside of an insane abnormality, you can find a balance between shielding yourself from redemptions and being able to earn as much as possible with your PLS.

At the end of the day, though, it’s up to you to choose the strategy that works best for your needs. Only you can decide the risk and reward ratio that you’re comfortable with.

Launch the Liquid Loans DApp to check out these analytics for yourself, and see how much passive income you could make today.

Articles in the “Chain Reactions” series are fast-paced DeFi opinion pieces. They do not necessarily reflect the view of, nor is any of the content hosted on this website a substitute for financial advice.

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Disclaimer:Please note that nothing on this website constitutes financial advice. Whilst every effort has been made to ensure that the information provided on this website is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we strongly recommend you consult a qualified professional who should take into account your specific investment objectives, financial situation and individual needs.

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Connor is a US-based digital marketer and writer. He has a diverse military and academic background, but developed a passion over the years for blockchain and DeFi because of their potential to provide censorship resistance and financial freedom. Connor is dedicated to educating and inspiring others in the space, and is an active member and investor in the Ethereum, Hex, and PulseChain communities.

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